Failures Projected as Mortgage Insurers Struggle

I’m on my way home from Europe, so I asked Gavin Magor, Weiss Ratings’ senior financial analyst, to fill in for me today. As you’ll see, Gavin’s current thoughts on the financial health of mortgage insurers — and the broader implications for the housing market — support everything Mike Larson told you here last week. Read on for the full story … — Martin

Mortgage insurers are in big trouble. Losses account for 154 percent of premiums earned. And they totaled a jaw-dropping $2.4 billion in 2010, thus threatening to destroy the mortgage insurance business, which is dominated by six groups.

The insurers are facing serious threats to their very existence as the financial crisis continues. So is it inevitable that they’ll fail? Certainly their struggle is a factor slowing the housing market’s recovery.

Weiss Ratings recently examined the 34 largest mortgage insurers’ performance through the first quarter of 2011. Subsidiaries of MGIC Investment Corporation (MTG), Radian Group (RDN), Genworth Financial (GNW), PMI Group (PMI), American International Group (AIG) and Old Republic International Corporation (ORI) wrote 80 percent of the $4.4 billion of premiums in 2010.

These same companies also recorded $1.7 billion or 71 percent of the combined $2.4 billion losses. United Guaranty Residential Insurance Co. (an AIG subsidiary) is the only large insurer that had a profit during 2010 and for the first quarter of 2011. And Mortgage Guaranty Insurance Corp (MGIC) recorded a profit in 2010.

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With losses of $618 million in the first quarter of 2011 and no sign of significant improvement in the economy for the remainder of the year, it appears that the $2.4 billion in losses mortgage insurers suffered will be matched in 2011.

These losses were not on the back of increasing premiums. In fact, it was exactly the opposite!

With $3.5 billion out of the $4.4 billion of premiums written by the largest insurers, only Radian Guaranty Inc, saw a rise in premiums, increasing 3.5 percent. The remainder of the companies had drops of between 6.4 percent and 21.6 percent.

So why does this matter?

Well, the losses and lower premiums are additional evidence that the housing crisis is nowhere near an end. In fact, without mortgage insurer guarantees, lenders might not extend loans to low down-payment borrowers at prevailing interest rates. And with government guaranteed FHA loans scarcer than ever, there may be nowhere for these borrowers to turn.

The bottom line: If insurance is not available at the lower end of the housing ladder, sales of existing homes face continued weakening.

Of the thirty four mortgage insurers reviewed in the Weiss Ratings’ study, only 6 (18 percent) were rated as having strong financials with 19 (56 percent) rated as weak, including all of the largest.

[Editor’s note: For a table of mortgage insurance company information from Weiss Ratings, click here.]

And from an investing perspective, a look at Weiss Watchdog, shows PMI rated D-, MTG rated D, and GNW rated C-. Not too enticing unless you can find signs that insurers are actively engaged to turn the tide.

Losses Mounting …Cash Dwindling

With insufficient capital to meet state regulator requirements, PMI Mortgage insurance Co. may be unable to write any new policies. The company recently set up a new insurer specifically to write new business, but his company hasn’t written many policies so far. And according to the Associated Press, PMI’s CFO, Donald Lofe, indicated that the group may consider bankruptcy, although it has no immediate plans to file.

Capital and surplus — the dollars that remain after insurers subtract liabilities from assets — has been dropping for the 34 companies we examined, from $7.7 billion as of December 2010 to $7.2 billion as of March 31, 2011. Losses account for the vast majority of the $494 million (7.4 percent) drop in capital. On an annualized basis this would result in a further $1.5 billion or 21 percent drop in capital to around $5.7 billion.

For some insurers, the key to writing new business is continued waivers from the state regulators over the maximum 25 percent risk-to-capital ratio required. Both PMI and Old Republic exceeded this level during the second quarter of 2011.

The rate of losses is unsustainable. The only question is whether some insurers will stop writing business before they run out of capital. And even then their survival is on a knife edge.

With parent company stock prices dropping an average of 64 percent this year as of Thursday’s close and a price-to-book value of 35 percent or less for each of these stocks — Old Republic being the exception at 62 percent — it appears the markets are wise to be concerned.

Investors beware … speculators may see opportunities.

Best wishes,

Gavin Magor

P.S. Do you know the financial strength of your bank and insurance company? If not, I urge you to go to Weiss Ratings and get it, FREE, right now!

P.P.S. To learn how some insurers are working to help borrowers stay afloat, click here.

{1 comment }

Ed the GrocerTuesday, August 23, 2011 at 12:20 am

Gavin,
What stands in the way of making most mortgages full term? It would mean that if you can make the payment, you still have a home or business. Now, every time you are up for renewal, you stand a chance of rejection. And what would you do if your mortgage required both husband and wife working to qualify and you were up for renewal and one of was unemployed? You would likely just stop paying while you were ahead.
Ed the Grocer